OREANDA-NEWS. Fitch Ratings has affirmed PT Pakuwon Jati Tbk's (Pakuwon) Long-Term Foreign-Currency Issuer Default Rating (IDR) and foreign currency senior unsecured rating at 'BB-'. The Outlook on the IDR is Stable.

At the same time, the agency has also affirmed the rating on the USD200m senior unsecured notes due in 2019 at 'BB-'. The notes are issued by Pakuwon Prima Pte Ltd and guaranteed by Pakuwon and some of its subsidiaries.

The affirmation with Stable Outlook reflects Pakuwon's sturdy presales performance amid challenging conditions in Indonesia. Pakuwon's presales in 2015 also outperformed that of most peers; it declined by 2.5% yoy compared with the 11% drop in the consolidated presales of the seven property developers tracked by Fitch.

KEY RATING DRIVERS

Solid Investment Property Portfolio: Pakuwon's ratings reflect its strong investment property portfolio, which is driven mainly by its mall operations and generated around 80% of its total recurring revenue in 2015. Pakuwon's malls have over 90% occupancy rates and have long-term lease expiry profiles of six-seven years on average. Fitch expects Pakuwon's recurring EBITDA/interest coverage ratio to remain above 2x, and recurring EBITDA to comfortably cover loan amortisation and dividend payment in 2016-2018.

Strong Brand: Cash flows from property development are inherently volatile, but Pakuwon was among a few developers that bucked the downturn in the market. Fitch believes that this stems from Pakuwon's market leadership in Surabaya (Indonesia's second-largest city), which provides Pakuwon with strong pricing power and rendered its presales less sensitive to the economic downturn relative to its peers.

Limited Scale and Diversification: Pakuwon's rating also reflects its relatively small development property scale and limited project diversification compared with higher-rated international peers. Pakuwon's current land bank of over 400 hectares still allows for over 10 years of development, but the relatively low number of projects, modest presales and lack of geographical diversification will remain a constraining factor for the medium term.

Conservative Financial Policy, Leverage: Pakuwon has historically maintained a conservative financial profile and has a track record of low leverage. In the past three years, Pakuwon has managed to keep its leverage (net debt/ net inventory ratio) below 30% and maintained its net debt/ EBITDA ratio at 0.2x-1.1x. Fitch expects Pakuwon's leverage to fall to 14% by 2018, as demand and the cash collection cycle improve. Fitch believes that Pakuwon's leverage remains appropriate for its 'BB-' rating.

Manageable US Dollar Exposure: Fitch believes that Pakuwon's solid recurring EBITDA generation provides a comfortable buffer against the depreciation of the Indonesian rupiah against the US dollar. Fitch estimates that Pakuwon's recurring EBITDA/ interest coverage ratio will remain above 2x should the rupiah depreciate to 15,000 per dollar. Furthermore, Pakuwon has hedged the full principal of its US dollar bond against depreciation of the rupiah using a number of call spread agreements, with overall upper-lower strike range of 13,000-17,500 per dollar.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:

- Presales of IDR2.8trn, IDR3trn and IDR3.5trn in 2016, 2017 and 2018, respectively

- Recurring EBITDA margin of 55.1%, 55.8% and 55.4% in 2016, 2017 and 2018, respectively

- Average investment property rental charge growth of 4%-7% yoy in 2016-2018

- Capex of IDR2.5trn, IDR2.1trn and IDR1.9trn in 2016, 2017 and 2018, respectively

RATING SENSITIVITIES

Positive: We do not foresee positive rating action in the next two years. However, an upgrade might be considered if the investment property assets increase to above USD1bn and its top three investment property assets generate less than 60% of recurring revenue (2015: 78.2%)

Negative: Future developments that may, individually or collectively, lead to negative rating action include:

- Sustained deterioration in the ratio of recurring EBITDA from investment properties to interest to below 2.0x (2016F: 2.3x)

- Net debt/net inventory (net inventory defined as investment properties + inventory + property and equipment - advances) rising above 35% on a sustained basis (2016F: 27.3%)

- Weakening of the business profile that would be reflected in a significant rise in vacancy rates or a sustained fall in rentals

- Share of cash flows generated from investment property falls to less than 40% (2016F: 54.1%)

LIQUIDITY

Sufficient Liquidity: As of December 2015, Pakuwon had cash balance of IDR2trn and unused credit facilities of around IDR2trn, which are adequate to cover outstanding short-term debt of IDR536bn and budgeted capital expenditure of around IDR2.5trn in 2016.

FULL LIST OF RATING ACTIONS

PT Pakuwon Jati Tbk

Long-Term Foreign-Currency IDR affirmed at 'BB-'; Outlook Stable

Foreign Currency Senior Unsecured rating affirmed at 'BB-'

Pakuwon Prima Pte Ltd

USD200m outstanding 7.125% senior unsecured notes due 2019 affirmed at 'BB-'